Thursday, February 5, 2009

As the amount of Mr. Obama's "stimulus" (newspeak, evidently, for "pork") continues to escalate from incredible, to unbelievable, to beyond human comprehension, we thought we'd ask ourselves a simple question: "How would we spend what will soon amount to over $1 trillion in light of Just Third Way principles?"

This is a question that can only be answered in stages. The first stage is to realize that, in a justly structured economy, there would never be a question of the State deciding how to spend a pot of money, and then putting an unconscionable burden of debt on future generations to pay for it. No, because certain proposals under the Just Third Way are, in part, predicated on the validity of Say's Law of Markets and the Real Bills doctrine, we realize that you can't spend what you don't have. Production equals income . . . and you can't just go out and create money (additional purchasing power) that is not tied to an equivalent value of new production.

It doesn't matter how much you have piled up unsold in warehouses, how many "toxic assets" a bank holds, or even how many homes are foreclosed. The money already exists to purchase these things. Creating more money inflates the currency — and creating what will soon amount to more than $1 trillion of purchasing power tied to existing goods and services could very easily ignite hyperinflation.

The "proper" response (actually, "barely rational response") when faced with the current situation is not to create new purchasing power for existing goods and services and redistribute wealth indirectly through the extremely risky method of inflation. When faced with such a colossal mess and an inability to think of anything better, the "right" thing to do is redistribute wealth directly by raising taxes to the point where all wealth that someone is not consuming is taken and redistributed among people who will use it for consumption — or at least tax the haves enough to provide the have-nots with enough to keep them alive and well until they can get back on their feet.

Thus, stage one is to keep people alive and well by taking care of them temporarily. This is going to cost some money, but it's money that's already out there. Tax the rich enough to meet these emergency needs, then lift the tax once the emergency is over.

This leads to stage two. The haves will immediately protest that if you tax away their unconsumed wealth, they won't be able to finance new capital formation, new jobs will not be created, and the economy will decline even more rapidly.

Answer: every reader of this blog knows that the commercial banking system combined with the Federal Reserve has the power to create money. It's where Mr. Obama plans on getting the bulk of the $1 trillion pork pie he's requesting. If you can create money for consumption, you can create money for investment. You don't need the haves to finance capital formation out of their unconsumed wealth. You just need access to capital credit.

Thus, stage two is to shut off the money spigot from the Federal Reserve to the government, consumers, and speculators, and turn it on for people who will use it to finance investment in new capital. This is all the stimulus anybody needs — and it won't cost the taxpayer one cent.

For stage three, things actually get easy. We need to identify our first investment, ideally one to which every single American currently has access . . . but is unable to finance due to lack of capital (not consumer) credit — that credit coming from opening up the Federal Reserve capital credit spigot for ordinary Americans.

What is most people's single largest investment? Their house. The problem is that it's not really an investment. Housing is a consumption item . . . unless . . .

Unless you're a landlord purchasing property to rent out to a tenant. Then what would ordinarily be a consumption item for you turns into an investment (capital) for you, and a consumption item for your tenant.

That being the case, what's wrong with being both landlord and tenant? The rent you pay as tenant then becomes the means by which you as landlord pay for your investment. This is the financial technique of purchasing only investments that pay for themselves within a reasonable period of time out of the income that the assets themselves generate, that is, "self liquidating" assets. The purchase of existing facilities, including rentable space, by creating new money to do so is as sound as financing future construction — better, in fact, because you have a "track record" of established tenancy or production to provide a solid indication of the present value of the future income stream.

An added bonus (and it's a big one) is that many analysts believe housing is the primary "leading economic indicator." Save the housing market, and (so many analysts believe) you will have saved the entire economy. (You could say something similar for food and clothing, but you must live where you live — meaning you can't live where you are not — while you don't have to grow your own food or make your own clothing right there.)

Stage three is thus to save the housing market, and do it in a way that turns a consumption item into an investment so that you can create the money to save the market in a non-inflationary way. We haven't mentioned it lately on this blog, but there is a proposal to do just that, the "Homeowners' Equity Corporation," or "HEC."

A HEC is a proposed for-profit stock corporation whose shareholders would be homeowners in danger of foreclosure. HECs — and there should be many, to provide redundancy, lower risk, and ensure competition in a community — would purchase distressed properties at the current market value. HECs would obtain acquisition loans from commercial banks, which in turn would discount the loans at the local Federal Reserve at a rate reflecting transaction costs and a revised risk premium. The homes could then be leased at a realistic market rate to their former owners or new tenants.

The tenant would earn shares in the HEC as lease payments were made sufficient to cover debt service, maintenance, and taxes. When the acquisition loan for a particular property was fully paid, the tenant could exchange his or her HEC shares for title, or continue as a tenant/shareholder at a reduced lease payment, sufficient to cover maintenance and property taxes.

Financing the purchase of properties through the Federal Reserve System and its member banks would cost the taxpayer nothing and be the first step in restoring a currency backed by hard assets instead of increasing mountains of government debt. Let the free market decide what happens to those institutions deemed "too big to fail." If they truly are "too big too fail," then they won't. Otherwise, they clearly weren't "too big to fail" at all.